Consumer advocates, fair housing groups, banks and mortgage lenders don’t always play on the same team, but today they joined forces to critique the Federal Housing Administration’s proposed servicing defect taxonomy.
In a joint letter to Lopa Kolluri, FHA’s principal deputy assistant secretary, the American Bankers Association, Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Action, Housing Policy Council, National Consumer Law Center, National Fair Housing Alliance, National Housing Conference and the National Housing Law Project said HUD’s proposed defect taxonomy did not provide enough specifics on loan-level defects and remedies to be successful. The groups said HUD should not finalize the taxonomy before doing further engagement with stakeholders.
The groups said that a successful taxonomy should prioritize violations, assess severity based on the level of harm the conduct poses to borrowers and FHA, assign a range of appropriate remedies for each specific violation and clarify how HUD will determine a remedies and address systemic defects.
The current draft taxonomy does not meet those criteria, the groups wrote. The taxonomy also fails to mention borrower harm in its draft taxonomy, instead only focusing on harm to the property and the FHA.
While the taxonomy is meant to provide clarity on the rules of the road for servicers, the groups said it seems designed for loan origination reviews. The groups argued the taxonomy should account for differences between servicing and originations.
“Servicers, for example, are engaged in long-term relationships with many thousands o borrowers at one time,” the letter reads. “A severity assessment must differentiate between those defects that have an ongoing impact on multiple borrowers and those that reflect isolated errors with no material impact on borrowers.”
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A HUD spokesperson did not immediately respond to a request for comment.
On Oct. 28, FHA released its draft defect taxonomy for loan servicing, the agency’s method of identifying loan-level defects and remedying them. Industry stakeholders at the time took issue with vague potential remedies, and said the taxonomy could drive away large depositories, who have in recent years fled the FHA market in the wake of False Claims Act enforcement actions.
According to the taxonomy, if FHA were “unable to determine servicing compliance due to missing or incomplete records, individual account information or related data,” the penalty could be as painless as furnishing mitigating documentation, or as harsh as life-of-loan indemnification.
Steve Sharpe, a staff attorney at the National Consumer Law Center who focuses on mortgage servicing for FHA, the United States Department of Agriculture and Department of Veterans’ Affairs-backed loans, said that ambiguous penalties could result in overly severe punishments for trivial mistakes. It could also lead to too-soft remedies for defects that cause systemic harm.
“If you have every possible remedy — from [the consumers’] side it could be, “Well, you won’t have a harsh remedy for the really important defects,” Sharpe said.
“What we’re saying jointly is that this is complicated, and we should talk among all stakeholders, to define the really high-priority defects, and what would be an appropriate standard to address the defects.”